Square Mile set for boom as optimism hits three-year high

The recovery in the City of London's fortunes has "firmly taken hold" according to the latest report to herald a strong economic rebound for the UK.

The CBI said its quarterly survey of the financial services sector, released today, showed profits were rising at their fastest rate for more than three years. Optimism, employment, turnover and investment all turned up during the final three months of the year, it said.

"It is clear that the recovery, which began early last summer, has now firmly taken root," said Ian McCafferty, the CBI's chief economist.

A rebound in the City would have knock-on benefits for the rest of the economy as stock markets and takeover activity boomed and higher City bonuses fed through to the high street and the housing market.

It would also be a boon for the Government, which has factored a sharp recovery in City-based tax revenues into its forecasts for an improvement in the public finances.

The CBI's survey of companies across banking, finance and insurance found that optimism had risen to its highest level since June 2000. Profitability rose at the quickest rate for just over three years.

This fed through to companies' employment prospects, with some launching their first recruitment drives for a year following massive job cuts in the first nine months of 2003.

Business volumes rose for the third quarter in a row, thanks to the fastest increase in business with private individuals for more than four years. Fund managers and building societies experienced the fastest growth in business, with fund managers and securities traders enjoying the largest rise in profitability.

Mr McCafferty said: "Rising share prices and the recovery in the wider economy at home and abroad are underpinning the continuing revival in financial services. Both sentiment and activity are now on a clearly rising trend, as the recovery takes hold."

It is the latest evidence of a turnaround in the UK economy. Quarterly GDP growth has accelerated from 0.2 per cent at the start of the year to 0.8 per cent in the third quarter, the stock market has risen by more than a third since it troughed ahead of the Iraq war, and the services, manufacturing and construction sectors are all showing stronger growth.

Today's survey findings will add to speculation that the Bank of England will raise interest rates next month to 4 per cent to head off incipient inflationary pressures.

However PricewaterhouseCoopers, the accountancy firm that sponsored the survey, warned that the current optimism in the City might not be sustained. John Hitchens, its UK banking leader, said: "Optimism is tempered by concerns that spending growth is not sustainable. Although the outlook for jobs was better than for many surveys, pressure on costs will accelerate if volumes slow down, with institutions re-examining options such as outsourcing."